Call it whatever you want, but it's the greatest tax payer subsidy ever proposed for an NHL team/arena and likely the greatest ever of all of the 4 major sports.
It might be the greatest spectacle of all time but NFL teams have received far more generous subsidies. Fish posted the Vikings link and that may not even be as generous as the Raiders, Rams, and Bengals deals.
The cost of the arena is not a subsidy; Glendale owns the arena.
* This is all semantics and admittedly serves no purpose but I do enjoy the topic and the debate.
Arena/Stadium construction becomes a subsidy when the owner of the facility forfeits all of the revenue generated by the building to the tenant. Ownership of the facility often becomes an additional subsidy as it allows the tenant controlling the building revenue to avoid paying property taxes.
If City X pays $1B to build a stadium, then leases that stadium to Team Y in a manner that allows the team to realize all of the stadium revenues, the cost of construction is a subsidy. The city is bearing an expense for the benefit of the team. Further, by maintaining ownership of the building, City X is granting Team Y an additional subsidy in the form of property tax avoidance (and perhaps capx avoidance as well). There could also be tax-exempt bond mechanisms to pay for construction or other such components which would further increase the value of the subsidy. There is quite a bit of academic research on this subject.
The $324 is not all subsidy, either. It's a high figure, but arena management services are being rendered. If you want to quantify a level of subsidy, you need to look at the difference between this figure and what it "should" cost to manage the arena. Consensus in here previously has been $8M-10M/year in today's dollars is reasonable. Over 20 years this would come to $160M-200M in today's dollars. The $324M over 20 years figure is $203M in today's dollars (assuming a 6.5%
discount rate and the year-by-year payment structure of the draft agreement). This would appear on the surface to be a subsidy for arena management of $3M-43M in today's dollars over the 20 years.
Your phrasing appears to have omitted several key components.
*I was going to facetiously say "What? Your ledger doesn't have a revenue column?
" However, I figured that you or the others would probably take it the wrong way and then the whole point would be lost. I would have meant it in a lighthearted way but it would have likely been received as demeaning and arrogant. Just thought I'd mention that. Anyway, let's continue...
There are a couple of clarifications that might be helpful here. We should probably start with some definitions:
"Arena Management Services (AMS)" the act of booking the arena and completing the accompanying administrative tasks
"Arena Operating Expenses (AOE)" the cost of operating the arena for the purpose of hosting events
"Arena Operating Revenue (AOR)" the revenue generated from the events held at the arena.
*I'm not concerned with the dollar figures at all. I used whatever amount you provided for convenience.
In your equation, it appears that you combine AMS and AOE in your "should" cost $8M-10M/year to manage the arena figure. I think that makes sense as they are both expenses. However, your formula completely omits AOR. Where is the revenue generated from the events held at the arena in your accounting? I'm not suggesting that we apply GAAP to our internet message forum posts but even sketching out the transaction for entertainment purposes should include expense and revenue, no? This is the point of origin of Clarkonomics. Just isolate whichever side of the ledger favors your position and completely ignore the other side. "We have to pay someone to manage the arena" Yes, Joyce; but you probably shouldn't pay someone who is going to keep all the revenues from your building in addition to taking the management payment.
Seriously? Have you ever heard such an absurdly stupid notion? We have to pay all this money to operate the arena but there are no profits from it. How can you program arena events that cost that much to operate yet deliver no revenue?
Back in reality, far away from Joyce Clark, publicly available data from other arenas demonstrates that the AOR figure is proximate to the AOE*. If you spend $8-10M/year to operate the arena, you're going to make $8-10M/year in revenue from the arena. For the Clarkonomic students out there, allow me to repeat that: If you pay the operating costs for a property, it stands to reason that you will receive the operating revenues generated by the property. Over 20 years the AMS/AOE expense comes to $160M-200M in today's dollars and the AOR comes to about $160M-200M too. That makes the net of arena operations: $0*
*I'm fine with any case that presents this number as slightly higher or lower than $0 depending on market conditions for any given year.
By comparison, in the JIG lease, over 20 years the AMS/AOE figure is $203M in today's dollars and the AOR figure (per GlendaleAZ.com) is $44.9MM. That makes the net of arena operations: -$158.7MM.
The
net cost of arena operations without the Coyotes is approx. $0
The
net cost of arena operations with the Coyotes is approx. -$158.MM
That, Fish, appears on its surface to be a large scale subsidy.
How do you get around this problem? You retain Thomas L Hocking to skew the revenue numbers. This is why I have long contended that the deal would not likely survive a gift clause challenge. These are the Hocking assumptions used in the gift clause analysis for arena operations without the Coyotes:
AMS+AOE = $192MM NPV
AOR = $15.6MM NPV
NET: -$176.5MM
Of course, Hocking is currently a defendant in a fraud trial for providing intentionally misleading forecasts for another arena.
At least in the arrangement with the NHL their payment is reduced if losses are less than $25 million.
